2015_2-Fall)_(18)
For calculating IRIS 11 and the one-year development after the commutation, I do not understand why we subtract the price (2,000) and add the commuted losses (3,500), instead of the other way around or alternatively, subtract the new ultimate loss and add the old ultimate loss.
I would expect that, since the ultimate losses after the commutation are lower, why wouldn't the one-year development also be lower?
Thanks,
Destin
Comments
Your last statement is not correct - the ultimate losses after the commutation are higher. The net ultimate before the commutation was 8,750 whereas after it was 10,250. (You didn't have to calculate the new ultimate loss in part (a), but you could have once you have the new ceded values.) Remember that in a commutation, the primary insurer is getting back the losses it had originally ceded to the reinsurer, and the reinsurer is no longer involved.
Actually, I found it easier to wrap my head around this problem by calculating the "new" 1-yr development as:
That's sorta similar to the second solution they provided in the examiner's report except they used the corresponding ceded amounts:
Does that answer your question? It's kind of a confusing problem.
I'm just an idiot and was focusing on the ceded portion for some reason; this is exhausting. Thanks.
Oh, don't beat yourself up too much. It sounds like you actually did understand it but you just got that one small piece mixed up. :-)
Why isn't the tax impact considered in this question, for adjusting PHS?
Actually, your answer is accepted if you considered the tax impact. Note that the CAS solutions for IRIS 2 and 7 provide alternative ways where the marginal tax impact of the commutation on net income is calculated, with a factor of (1-.35). But it's true that the tax rate is not provided in the question - you need to assume it from your general knowledge, if you want to go the way of considering tax.
For part a, the examiner's report said we are expected to know that the ceded loss reserve is set to 0. Why is that, why isn't it the typical net resv*qs%/(1-qs%).
Commutation means the cedent re-assumes future payments (i.e. reserves) that would have been ceded under the reinsurance contract, for a price paid by the reinsurer. So, after commutation, the cedent cannot report any ceded reserves for the 2012 year.